Adam Smith's Lost Legacy

Tuesday, March 31, 2009

Why Bother With Adam Smith?

Mark Thoma of the authoritative Economist's View Blog re-posts my 'Thought for the Day - 3' posts of yesterday HERE, as 'Why Bother With Adam Smith?'

There are several interesting comments from his readers, to one of which I penned a response, explaining why Lost Legacy seeks to defend Adam Smith's Legacy from its virtual hyjack by Chicago in the 1930s and the consequencies of attributing to Adam Smith their fallacious ideas about self-interested corporations.

Interestingly, the intervening period between the 1930s depression and today's is a clear example of what goes wrong with misreading the history of economics.

Those who do not understand the past are condemned to repeat it, sooner or later.

It's not that Adam Smith had the answers to modern depressions; it's that inventions about his alleged views that justify modern interpretations of the appropriate policies - let self-interest rule whatever the self-interests of the players - leave policy determination to whatever is sellable electorally or enforceable politically; surely a rash form of civil governance?

Smith In Glasgow

I shall be away for three-days at a 250th commemoration seminar for the publication of Adam Smith’s Theory of Moral Sentiments (1759).

There will probably be light Blogging until I return unless I can find a connection (or how to work my iphone).

The programme both for the seminars and for the main events shows quite a galaxy of major Smithian scholars presenting their papers (‘spoilt for choice’ is my problem). I shall report on the events I attend (I am chairing one of the seminar sessions) and on the people I meet, some of whom were at the Balliol College conference in January, including David Raphael, who edited the Oxford University Press, Standard edition of Moral Sentiments.

Amartya Sen is presenting the main paper on Thursday, and pre-releases suggest it is a major event for economists on the current problems from his unique authoritative perspective.

Monday, March 30, 2009

Never A Theory of Markets

Jacqueline Best (a professor in the School of Political Studies at the University of Ottawa and the author of The Limits of Transparency),writes in Globe And MailHERE:

Market's ‘invisible hand' is supposed to be just

“We forget that Adam Smith, the father of modern economics, held a chair in moral philosophy at Glasgow University. He argued that the “invisible hand” of the market economy was not just economically efficient, but also politically and morally beneficial – ensuring that the pursuit of individual self-interest would ultimately provide for the public good.”

CommentJacqeline asserts the above with the authority of her professorship, but in doing so she purveys a major myth about Adam Smith and the ‘invisible hand’.

Adam Smith did not argue that ‘the “invisible hand” of the market economy was not just economically efficient, but also politically and morally beneficial – ensuring that the pursuit of individual self-interest would ultimately provide for the public good.’

He did not relate the metaphor of ‘an invisible hand’ to ‘the market economy’. His detailed discussion of the ‘market economy’ was concluded in Books I and II of Wealth Of Nations without mentioning The Metaphor of ‘an invisible hand’ at all.

His sole use of The Metaphor occurs in Book IV in his critique of Britain’s ‘mercantile political economy’, which legalised several monopoly practices prevalent in the 18th century. In this instance, he showed how the legal colonial monopoly of trade with the British colonies in North America, under the Navigation Acts, enforced by the Royal Navy and customs officers in every British seaport, heavily distorted British domestic capital growth.

However, those British merchant traders who were risk-averse to the Atlantic sea trade, despite its greater profits, who preferred to invest their capital locally, also benefited British domestic capital investment – the whole is the sum of its parts, or and the more ‘parts’, the larger the ‘whole’.

After explaining the nature of the risks of distant overseas trade, and how some, but not all, preferred the home trade, he showed why this was beneficial for Britain (Smith was not too keen on the then colonial policy because of the inevitable costly wars with France).

As his argument was fairly complex (you must read the whole chapter in Book IV, chapter 2), and for those of his readers who found it difficult to follow, he followed with his, now famous, metaphor of these merchants being ‘led by an invisible hand’.

So inconsequential was his use of The Metaphor that neither he, nor anybody else until the late 19th century, commented upon it. It was never Smith’s view that the ‘invisible hand’ was ‘not just economically efficient, but also politically and morally beneficial – ensuring that the pursuit of individual self-interest would ultimately provide for the public good.’ That is a false attribution; worse, a pure ‘invention’.

He certainly preferred competitive (not monopoly) markets to non-markets (though he also preferred government action where necessary), but in both cases the ‘invisible hand’ played no role.

Moreover, it was only in Chicago in the 1930s that The Metaphor was generalised into Smith’s so-called ‘law’ of markets. Paul Samuelson (1948, 1st edition), in his famous textbook, Economics (16 editions), publicised this invention with the inevitable affect on modern economics, as tens of thousands of his readers took it on trust as true.

Thought for the Day - 3

One benefit, at least, of not being able to work for a few days, which included not reading my email alerts on Adam Smith across the world’s media, is the time it created for reflection. Not that this produced much retained sense; more a dream-like flow of unrelated thoughts, among which were strings of thoughts about roosting chickens.

There is a debate underway among historians of economic thought on whether economists really need to study the history of ideas in what we may loosely term our discipline. Those economists who take the view that the history of economic ideas really has nothing to do with modern economics, point to it being unnecessary for ‘real scientists’ to read the works of Isaac Newton, and his lesser luminaries, so why bother with Adam Smith and the rest?

My views on this debate (I have not joined in, so far) are predictable. The physical world is fairly constant – each and every carbon atom is assumed to behave the same way, and has done so through the ages, and unless that changes in known circumstances, its properties and relationships with other atoms are not expected to change. Knowledge gains in hard sciences build upon earlier knowledge gains, and future knowledge gains continue the process.

Turning to economics – part of human sciences – it is quite different. We hardly know about past economic history; even recent history is controversial and is wll sshort of arriving at a settled view. There are political views of economic behaviours – as far as I know, we do not have ‘leftwing’ or ‘rightwing’ carbon atoms – and we do not have a settled view on what constitutes economic society or on what would constitute a society that could be said to be the basis for all further societies without (controversial) changes.

As economics was derived from political economy, shedding within a century, philosophy, sociology, anthropology, history, politics, psychology, and such-like, though, unfortunately not shedding mysticism, idealism, utopianism, and, eventually, all traces of real human beings, an imaginary world has replaced the real world.

Now, that there were great gains from this process is not disputed, of course, but questions arise as to the costs in what the great ‘gains’ do not explain. Apart from which there is genuine concern about the usefulness of the abstract when directed at policy-making in real human societies. Even among the most mathematically-oriented of economists there is no agreement as to whether policy A is ‘better’ than policy B (or policy C to Z).

It is not as if modern economists are better fitted in 2009 to understand (stepping down from ‘to advise’) than their predecessors, already starting down the road we’ve travelled, in 1909 (or for that matter 1809). The current ‘global crisis’ has not produced a consensus among the brightest in our profession (Nobel prize winners stand on opposite sides with different prescriptions) as what should be (could be) done, even if the players in the mix of, say, the G20 were minded to accept whatever advice the equations would give them.

And that’s the rub. The players do not behave as the mythical Homo economicus prescribes, and neither do all the other players in all the levels below them. The aggregates in an economy, however expressed neatly in well-behaved functions, do not capture what the models require of them. And their authors are impotent to make them do so.

It is not as if we are talking about wildly improbable outcomes from clearly defined categories (the effect of heat on molecules of a specific quality as taught in Physics 101). For a ‘hard science’, surely we can expect a straight answer to a simple operation like ‘quantitative easing’ and its likely affect on activity? My colleagues among the historians of economic ideas are debating, hotly, just now about what constitutes money. Unlike, the physicists, who agree on the role of gravity, modern economists are not so sure about the venerable role of money.

No wonder, that ideas of modern economics fall foul to the barely understood ideas of past economists, where they are not simply made up (as has been the fate of Adam Smith among many modern economists who assert his so-called ideas shamelessly without reading him). We may not need to read Newton’sPrincipia to add to the knowledge base (so far it has not let us down, though it has been improved upon safely because its foundations were so strong), but where did our ideas about money, for instance, come from, and where may our ideas about money be built on less secure foundations than the ‘certainties’ we were taught recently?

Thursday, March 26, 2009

Thought for the Day 2

‘Security, therefore, is the first and the principal object of prudence. It is averse to expose our health, our fortune, our rank, or reputation, to any sort of hazard. It is rather cautious than enterprising, and more anxious to preserve the advantages which we already possess, than forward to prompt us to the acquisition of still greater advantages. The methods of improving our fortune, which it principally recommends to us, are those which expose to no loss or hazard; real knowledge and skill in our trade or profession, assiduity and industry in the exercise of it, frugality, and even some degree of parsimony, in all our expences.' (TMS VI.i.6: 213)

CommentI have made many references to the use by Adam Smith of the metaphor of ‘an invisible hand’ in Wealth Of Nations (1776) and I thought it relevant to quote the above passage from Smith’s Moral Sentiments [1759, ed 6. 1790].

He discusses security and specifically mentions how security is ‘averse’ to exposing ourselves and ‘our health, our fortune, our rank, or reputation to ‘any sort of hazard’.

I was recently criticised by a academically respected referee for using the more modern term, ‘risk averse’, to describe the motivation for why some (but not all) merchants, discussed by Smith in Chapter IV (ii.9: 456) of Wealth Of Nations, preferred to trade and invest locally rather than take the risks of trading or investing abroad, particularly in the American colonies.

The referee considered ‘risk-averse’ as being about the utility functions of players in modern game theory and not applicable to the merchants that Smith identified in his famous ‘invisible-hand’ paragraph.

Despite my reservations, I accepted the referee’s assertion, not being able to lay my hands of the relevant quotation at the moment I needed it. But I found it this morning while looking for something else.

I consider Smith’s comments on the ‘prudence’ of ‘security’ and ‘aversion’ excuse my original mentions of ‘risk aversion’ as the direct cause of these merchants investing locally and thereby, on the arithmetical law that the whole number is the sum of its individual parts, the behaviour of these merchants, which unintentionally made domestic national output and employment larger in total than it otherwise would be, completely explain what motivated them to do so.

The outcome was brought about, and is eminently explained by the causes identified by Adam Smith before he used The Metaphor of 'an invisible hand', thus making The Metaphor redundant as an explantion, and with its redundancy ,all the subsequent chatter that The Metaphor itself was an explanation are shown to be wrong.

The modern myths of invisible and disembodied hands, including the 'Hand of God' and other mysteries, were not part of Adam Smith's original explanation for the phenomenon, the merchant's 'risk-aversion' ('he intends only his own security' (WN IV.ii.9: 456).

The real mystery, in my mind, is why so many respectable and senior fellow economists can read the same passage from Wealth Of Nations and endorse the modern myth.

In these circumstances I feel permitted to use the term 'risk aversion' as being the cause of the merchants' conduct, without implying any connections to elements of modern games theory.

Wednesday, March 25, 2009

Thought For The Day

‘What institution of government could tend so much to promote the happiness of mankind as the general prevalence of wisdom and virtue? All government is but an imperfect remedy for the deficiency of these. Whatever beauty, therefore, can belong to civil government upon account of its utility, must in a far superior degree belong to these. On the contrary, what civil policy can be so ruinous and destructive as the vices of men? The fatal effects of bad government arise from nothing, but that it does not sufficiently guard against the mischiefs which human wickedness gives occasion to’. [Adam Smith, Moral Sentiments: TMS IV.2.1: 187; 1872 edition: pp 165-66]

CommentAdam Smith was quite right. Utopian proposals and plans for reform that do not take account of human nature are prone to derision, if advocated, and to disappointment if implemented, and the unintentional results are obvious for all to see and suffer from.

As neat a description of party politics as could be offered for the many failings of governments. The only barrier to ‘human wickedness’ (which covers a multitude of crimes of commission and omission) is that of the system of justice, separate from government, and safeguarded by Liberty – democracy is a necessary but not sufficient condition (they ‘elect’ cruel dictators don’t they?).

Tuesday, March 24, 2009

A True Believer is Dumfounded

‘I’m continually dumbfounded by the fact that most people believe that the economy is controlled by the president and their administration. I first ask: “wouldn’t all presidents want a good economy? If so, why don’t they create it?”. I’m a big believer in Adam Smith’s “invisible hand” [HERE] Markets beat to their own cycle. Presidents are like bullriders trying just to stay on for 8 seconds and if they’re lucky, maybe they steer the bull in one direction for a brief moment.’

CommentIf you rely on Wikipedia for knowledge, you get what you don’t pay for, in this case rubbish.

The clue to the real problem is that Kirk Barrell is a ‘big believer in Adam Smith’s invisible hand'.

He exhibits an almost religious belief in a myth; the myth being that Smith’s use of the metaphor of ‘an invisible hand’ was re-invented in Chicago in the 1930s as a mystical force credited with miraculous powers – even Godly – which passed into mainstream academe, like a meme, virus, thanks to Paul Samuelson’s phenomenally successful textbook, Economics, from its first edition in 1948 to its 13th edition in 1989 (there are claims that Economics went through 16 editions), which claimed that Adam Smith had first talked about markets ‘as if led by an invisible hand’, when in fact he never did.

But millions of students read Samuelson and got the message about mystical invisible hands; the ‘belief’ is now firmly entrenched and such authority as Wikipedia may have, means that millions more will become believers too.

Quelle domage!

If only these people would read Adam Smith and see what he actually said. They would find that the metaphor of ‘an invisible hand’ was not part of Smith’s exposition of how markets worked.

They could also download an early version of my paper, ‘Adam Smith and the invisible hand: from metaphor to myth’ (HERE) and read for themselves what he actually said.

Monday, March 23, 2009

Power Bid Mentioning Hobbs and Smith

‘From Adam Smith’s defence of moral sentiment before economic self-interest to Debreu’s algebraic articulation of the informational requirements for a welfare-maximising equilibrium, economists have been clear that markets are incomplete and cannot be left to themselves.

Political economists since Thomas Hobbes and Adam Smith have understood that capitalism relies on state power to impose instrumental checks on greed and abuse of influence.’

CommentI think Trevor has got this wrong, somehow.

Adam Smith observed the role of moral sentiments in society; he did not invent them, not did he invent self interest, he observed its role too.

Debreu’s general equilibrium mathematics were a model of an imaginary economy without human beings. His equations were determinate within their assumptions, itself a triumph of pure analysis but with little scope for practical political economy.

Much like Oscar Lange’s neo-classical socialism for running the Polish economy (the planner to set prices MC=MR); it never ran the Polish economy and the Polish planners set prices as per the instructions of the Soviet planners, with the not unpredictable results).

Adam Smith’s view on ‘state power to impose instrumental checks on greed and abuse of influence’ was compromised as such by the fact that he identified British State power as a instrument of the ‘greed and abuse of influence’ of legislators and those who influenced them taking their advice from the ‘merchants and manufacturers’ who preferred monopoly, protectionism, and prohibitions that narrowed the competition which raised prices and reduced the real incomes of consumers.

I read his piece as a justification for increasing South Africa's state power in the economy as a instrument of the politicians in the government, prominent among them, of course, would be Travor Manuel.

Sunday, March 22, 2009

Poor Essay Quality Discredits Educational Value

Mark Vargus, described as a San Diego Economy Examiner, writes a regular series in the Examiner.com (HERE) :

‘Self-interest and greed, the economic driver according to Adam Smith’.

“When Adam Smith started his study that eventually became the book "Wealth of Nations" he was a professor of political philosophy at the University of Edinburgh. Perhaps because of his experience with philosophy he theorized that men were driven by what he called "enlightened self-interest and greed" and wrote that people would act according to that drive.

Today, the original meaning of that phrase "enlightened self-interest and greed" receives wildly different definitions depending on the economist and his interests. Its not difficult to come up with more than a dozen interpretations of what would be the drive for a human. However, I find that the solution starts with considering how a person of Adam Smith's time viewed the world around him.”

CommentI read essays from examiner.com fairly regularly. I am not sure what their business model is, but I have the impression their academic model is of poor quality, and, therefore, generally refrain from commenting on their essays.

However, taking a break this morning from my other work, I could not resist noting that Mark Vargus is particularly off-track in his above ‘essay’.

For a start, Adam Smith was never ‘a professor of political philosophy at the University of Edinburgh’, nor indeed was he ever a ‘professor of political philosophy’ anywhere else. Wrong town, wrong chair.

He gave some private lectures in the city of Edinburgh during 1748-51, from which he earned £100 a year, sponsored by Henry Home Kames, later Lord Kames after he became a judge.

Smith’s first chair was the chair of logic 1751-52, when the transferred to the chair of moral philosophy in 1752, both at Glasgow University.

He did not theorize ‘that men were driven by what he called "enlightened self-interest and greed". He certainly theorized about ‘self-interest’; the ‘enlightened’ bit was added by modern presentations of his philosophy.

He never ‘theorised’ about ‘greed’, except to criticise the idea that ‘greed' had any redeeming features, especially as it had been presented by Bernard Mandeville (‘Fable of the Bees: Private Vice, Public Virtue’, 1714/32), with whom Smith is often confused by modern essayists, and especially by Hollywood scriptwriters and not a few academics, who should know better.

To consider ‘how a person of Adam Smith's time viewed the world around him’ it would be a good place for Mark Vargus to start by reading what Adam Smith actually wrote about.

Overcoming my normal modesty, I suggest he reads my book, Adam Smith: a moral philosopher and his political economy’, Palgrave Macmillan, 2008, or, better still, he should read Smith’s ‘Theory of Moral Sentiments’ (1759) and ‘An Inquiry into the Nature and Causes of the Wealth Of Nations’ (1776). He could usefully read the best biography of Adam Smith, such as that of Ian S. Ross: The Life of Adam Smith, 1995, Liberty Books, Indianapolis (student-budget edition).

Only then should Mark Vargus (and the rest of the team at Examiner.com) write essays for students who rely on him to be a competent teacher about Adam Smith’s ideas.

Meanwhile, if the scheme's business model involves payment, then anybody tempted to pay for these essays, should hold off with their cash.

Saturday, March 21, 2009

Adam Smith and Robert Burns

Ian Hunter (professor emeritus in the Faculty of Law at the University of Western Ontario, and author of Robert Burns: A Tribute) reviews The Bard: Robert Burns, A Biography by Robert Crawford (Jonathan Cape), in The Afterword (’posting from the literary world’) in the National Post (Canada) HERE:

“It was on July 31, 1786, that Burns’s Poems, chiefly in the Scottish Dialect, was published; 612 copies printed by his friend John Wilson of Kilmarnock, today one of the most valuable first editions in the world. The book has never since been out of print. By the time the second Edinburgh edition was being prepared the following year, the subscriber list exceeded 3,000 names, including Adam Smith, who signed up for four copies. Burns was now the people’s poet, the poet of the common man “wher’er he be”; as Crawford puts it “the poet who will speak to anyone prepared to listen, regardless of class, culture or situation.”

This is why Burns’s poems have been translated into every language. It is why there are more statues of Burns in North America than there are for any other human being. It is why, on July 25, 1796, uniformed soldiers lined the streets of Dumfries for Burns’s funeral procession and why, for as far as the eye could see, locals walked in silence behind the casket as a band played the Dead March from Handel’s Saul. One young boy, watching the casket go by, was heard to ask his mother: “Now that Burns is dead, who will be our poet?” His mother thought and then said: “He will.”She was right in 1796; she is right today.”

Comment‘Twill surprise nobody who knows anything about Scottish history – and the Scottish nation – that there is controversy (sometimes bitter) about Robert Burns and his literary works.

Thankfully Robert Crawford has written a splendid biography that has restored some of the balance since the unfortunate Canongate Burns: the complete poems and songs of Robert Burns, edited by Andrew Noble and Patrick Scott Hogg, (2001) (Canongate Books, Edinburgh).

The snippet, quoted above (follow the link to read the whole review) reveals the link between the young Burns and Adam Smith. Smith’s subscription for four copies of Burns’ Kilmarnock (2nd) edition is typical; Smith had a great affection for poetry (his first ever appearance in print was to write a preface for a book of poems written by William Hamilton of Bangour in 1748; a copy of Smith’s preface is reproduced in Adam Smith’s Essays on Philosophical Subjects, 1982. p 261, Liberty Fund, Indianapolis).

The Canongate Burns, cited above, contains a complete misreading of both the poem by Burns and of Smith’sMoral Sentiments. The editors write:

‘As a writer he was a smuggler not an Excise man. It should also remind us not to read ‘O wad some Pow’r the giftie gies us/ to see ourselves as ithers see us!’ as a piece of sententious sentimentality but Burn’s two line demolition of Adam Smith’s concept of the creation of an internalized spectator in his Theory of Moral Sentiments as a form of secular conscience adequate to controlling our materialism and social pretentiousness’. (p 133).

This a travesty of the truth. Smith’sMoral Sentiments, which Burns admired, and Burns’ poem ‘To a Louse’, shared a union of sentiments, of which these famous lines summed their agreement, not their ‘demolition’:

‘To see oursels as ithers see us’ expresses their different perspectives: Burns, pessimistically, reminding us of human frailty and its consequences; and Smith, optimistically, mapping how most humans develop and maintain their moral senses.

Smith says we do have the power ‘to see oursels as ithers see us’ and he explains how we exercise it. We have this power,shared common ground), from what we may crudely describe as our conscience, or the effect of consulting our impartial spectator within, which helps us resist self-deceit. Smith is explicit:

‘… self-deceit, this fatal weakness of mankind, is the source of half the disorders of human life. If we saw ourselves in the light in which others see us, or in which they would see us if they knew all, a reformation would generally be unavoidable. We could not otherwise endure the sight.’ (TMS158–9)

We are not indifferent guardians of our reputations. In practice, other people are our ‘looking-glass’ through which we see ourselves in their eyes, not ours.

Once satisfied with what we believe they see (beware hubris!), we are less flattered by the applause of some and less bothered by the censures of others if, in the main, what we believe they see indicates natural and proper approval of our behaviour.

In this manner, our ‘first moral criticisms are exercised upon the character and conduct of other people’ in so far as they might affect us and we are ‘very forward’ in expressing our views.

But the traffic is not all one-way. We soon learn that others are equally forward in their criticisms of us! This causes us to review our conduct by imagining how we appear in the eyes of others.

If we wish to become less worthy of censure and more worthy of praise, we must discover how we might improve our behaviour. In effect we become ‘the spectators of our own behaviour’ and we imagine how other people ‘scrutinize the propriety of our own conduct’ (TMS 112) through their eyes, not ours.

If we believe what we see in the looking-glass of the spectator, we are ‘tolerably satisfied’ and can discount the applause and downplay any censure. On the other hand, we may be doubtful about the merits of their disapprobation, and provided we know we have not already ‘shaken hands with infamy’, we are doubly struck with the severity of their disapproval.

But if we are secure in our beliefs that we are ‘the natural and proper objects of approbation’, because our imagined spectator’s view of us is ‘tolerably satisfied’, we may reject misrepresentations of our conduct by others (TMS112).

Smith’s argument takes us right back to Burns’ scepticism: do people really see themselves as others see them? Smith’s response is ingenious. Society is our mirror, our looking-glass, and we create our moral compass from living in it, at least in so far as we avoid causing offence to others. But is this sufficient for us to act positively in a moral manner?

We are compelled, and almost in spite of ourselves, to ‘see ourselves as others see us’ (TMS 23) The result for society is a greater degree of tranquillity than would be thought likely in a society composed of individual egos who ignore (or defy) their impartial spectators.

The impartial spectator restrains individuals from unbridled expressions of their passions in pursuit of their interests, preferring ‘silent and majestic sorrow’ in place of ‘detestable … fury without check or restraint’, and thereby confines individuals to pursue their interests only to the extent that is equitable and proportionate to what the impartial spectator and ‘every indifferent person would rejoice to see executed’ (TMS 24).

From this binding relationship it follows ‘that to feel much for others and little for ourselves, that to restrain our selfish and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind the harmony of the sentiments and passions which consists their whole grace and propriety’ (TMS25).

Ironically, the Canongate Burns’ editors include in their controversial collection of poems they attributed to Burns an epigram ‘On the Late Death of Dr Adam Smith’, which appeared in the Gentleman’s Magazine, September 1790, page 843 (Smith died on 17 July, 1790):

‘Death and Hermes of late Elysium made boast,That each would bring thither what earth valued most;Smith’s Wealth of Nations Hermes stole from his shelf;DEATH just won his cause – he took of Smith himself.’

The lady in the Church, unaware of the louse on her hat and careless of the opinions of others, was a member of that portion of humanity that did not consult their internal impartial spectators, and was the appropriate candidate for Burns to mock; but of those who did fraternise with their impartial spectators, it was evident that Burns and Smith agreed on the benefits individually of so doing.

Friday, March 20, 2009

Adam Smith and Greed

“Capitalism is about greed. It's not exclusively about that. It's also about creativity and independence (the alternative to the market is some form of bureaucracy), providing a service or good that people need, and about providing jobs.

But greed is the motor that powers capitalism. Way back in the 18th century, Adam Smith understood this when he wrote in The Wealth of Nations that the self-interests of the butcher, the baker and the candlestick maker benefit the rest of us.Smith, though, also wrote a second book, one that he regarded as far more important. Its title was The Theory of Moral Sentiments. In it, he tried to come to terms with the ethical consequences of unleashed greed and self-interest.”

CommentIn what is a familiar story line, at least to readers of Lost Legacy, Richard asserts, as if it is self-evident (though not to the ultra-poor masses of unemployed labourers and their families in large swathes of the planet, looking in on the life-styles of the vastly richer peoples of Canada) that ‘greed is the motor that powers capitalism’.

Richard goes ‘way back’ to the 18th century when almost the whole world was stuck in poverty, superstition, disease that carried off most children who were born, and those who ‘survived’ had the luxury of living, if ‘lucky’ to the ripe old age of about 40.

Murder rates per thousand were higher than the most gang-ridden modern slum towns, illiteracy was almost total, and the ground where you first stood on (if you survived infancy) was the only ground you would ever know. Richard should ask himself: where would he rather live – in the slums of Mumbai or rural Darfur or the slums of Toronto?

His evidence for ‘greed’ apparently comes from his misunderstood point that Adam Smith allegedly made in that famous partial quotation ‘that the self-interests of the butcher, the baker and the candlestick maker benefit the rest of us’.

Actually, it was about the ‘Butcher, the Brewer, and the Baker’ from whom Smith observed that it was a more reliable way to get the ingredients for your dinner (obviously 18th century nutrition was not as well catered for in Scotland at the time, which is why many Scots left out shores for Canada, including my maternal grandfather, a coal miner, for Toronto) to appeal to the self-interests of said ‘Butcher, the Brewer, and the Baker’, rather than telling them solely about your self-interests or needs.

Why was this so significant?

Well, merely considering your own self-interests was unlikely to persuade them to serve you; two parties only intereted inn themselves cannot conclude a bargain, as Smith makes clear in the same paragraph that Richard misquotes:

‘He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.’ (Wealth Of Nations, I.ii.2: pp 26-27)

What is greedy about applying the observed offer to exchange what you have (money) for what he has (ingredients for your dinner)?

Smith did not quite write ‘a second book’ – The Theory of Moral Sentiments was in fact his first book (1759 – 17 years before Wealth Of Nations, 1776). In it he did not try ‘to come to terms with the ethical consequences of unleashed greed and self-interest’. He discussed how people behaved, well, kindly, or otherwise.

He discussed morality, including the morality of the historic development of property and its consequences, particularly the division of labour and the creation of complex supply chains that, from productivity. raised the ‘meanest labour’ in Scotland into higher standards of life than the most powerful ‘kings of Africa’ and North America, including around the area that became Toronto.

In fact, Smith decried the philosophy of Bernard Mandeville (1732), who claimed that ‘Private Vice was Public Virtue’, and he described it as ‘licentious’ and stated that Mandeville’s assertions about the benefits of greed were wrong in practice and in philosophy.

Richard aims at the wrong target. He might care to reflect on the basis for his assertions about Adam Smith.

"I was asked (challenged?) by a reader to provide examples of right-of-center political or economic theorists who are genuinely interested in the poor. There are many, but let me mention one classical source and one contemporary source.

The classical source: Adam Smith in his 1776 An Inquiry into the Nature and Causes of the Wealth of Nations. Smith's concern for the poor there is palpable and undeniable. Now some scholars argue that, partly because of that, Smith would not quite qualify as a right-of-center thinker (Samuel Fleischacker, for example, but there are many others), but I think Smith's defense of free trade, markets, and limited government do qualify him. He is not an anarchist or even a libertarian, and he does not subscribe to a theory of natural rights that, as in Locke or Nozick, give principled restrictions on state activity: Smith is too practical and pragmatic for that. But that makes him what is usually called a "classical liberal," not a progressive liberal.

The contemporary source: Deirdre N. McCloskey's The Bourgeois Virtues: Ethics for an Age of Commerce. McCloskey's argument is that capitalist institutions are not amoral but are, instead, positively encouraging of virtue. But a large part of her argument in that book is that capitalism has brought substantial and often unappreciated benefits to millions of people, including especially the poor. McCloskey draws explicitly on Smith in making her case.

The classical source: Adam Smith in his 1776 An Inquiry into the Nature and Causes of the Wealth of Nations. Smith's concern for the poor there is palpable and undeniable. Now some scholars argue that, partly because of that, Smith would not quite qualify as a right-of-center thinker (Samuel Fleischacker, for example, but there are many others), but I think Smith's defense of free trade, markets, and limited government do qualify him. He is not an anarchist or even a libertarian, and he does not subscribe to a theory of natural rights that, as in Locke or Nozick, give principled restrictions on state activity: Smith is too practical and pragmatic for that. But that makes him what is usually called a "classical liberal," not a progressive liberal.

The contemporary source: Deirdre N. McCloskey's The Bourgeois Virtues: Ethics for an Age of Commerce. McCloskey's argument is that capitalist institutions are not amoral but are, instead, positively encouraging of virtue. But a large part of her argument in that book is that capitalism has brought substantial and often unappreciated benefits to millions of people, including especially the poor. McCloskey draws explicitly on Smith in making her case.

CommentI fully appreciate Jim’s the line of argument. I have often posted on Lost Legacy about Smith’s ‘neutral’ approach to the labour-capital divide, when chastising writers from both left of centre and right of centre, and others at either of their extremes, who try to hijack Smith into being in favour of one side of the other.

Smith is a much more complex advocate for his approach to political economy than his critics appreciate.

He favoured reforms of the policies of mercantile political economy because they inhibited the full power of commercial society to grow, and in doing so, to put the unemployed to gainful and productive employment and, for those taking the initiative, to save towards an amount of capital stock and put it into productive activity, thus widening opportunities for increasing opulence, the beneficiaries of which would largely be the labouring poor.

Right-of-centre-minded people are, or should be comfortable with Smith’s policies for labour, and for commercial enterprise, and for government interventions at the macro-level. The same should appeal to left-of-centre-minded people too.

Extreme libertarians, of right and left (yes, they do exist) and traditional anarchists or Marxists may not be comfortable with anything less than their ideal utopias (or nightmares).

Smith was not an ideologue, of left or right (the concepts of left or right were unknown in his lifetime).

Origins of the Myths of the Invisible Hand

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Gavin Kennedy

I was looking for a reference in a book in my library and came across, at the back, as you do, my rather battered copy of Paul Samuelson’s popular textbook, ‘Economics’ (which I had looked for unsuccessfully for many years).

In the 1960s, my later edition of this book was the class textbook at my university; I also bought a first edition of it at a bookfair in the 70s.

I knew that Samuelson had mentioned the ‘invisible hand’ in his textbook and he is, in my view, more than anyone else, responsible for popularising the incorrect notion that Smith believed there was an invisible hand at work in the general economy, which in the minds of modern economists somehow, mysteriously, was behind the undoubted success of capitalism in making possible unprecedented living standards. (The Cold War was on and many academics and their students were more impressed with Marxism than capitalsm.)

The reputation of Paul Samuelson, from the start of his illustrious academic career, and the publication of his Phd, Foundations of Economic Analysis (1947), deservedly is enormous.

His popular textbook, Economics, was used to teach, literally, tens of thousands of post-war students, and even his latest writings on his profession (e.g., ‘Inside the economist's mind: conversations with eminent economists‎, 2007 show why his reputation was and remains so high.

However, Samuelson was certainly wrong on one subject.

Metaphors, like ‘waggon way through the air’ (Wealth Of Nations, II.ii.86: p 321)or the ‘invisible hand’ (IV.ii.9: 456), are representative, not real; they exist only as the imaginary image of what they allude to; they do not define to what they allude (Smith: Lectures on Rhetoric and Belles Lettres, 30-1).

Modern economists have projected onto a venerable literary metaphor a significance well beyond anything implied by Adam Smith, whom they allege was the originator of their modern and different, version of the metaphor.

Among the first to do so was Paul Samuelson, in the first edition
(1948) of his famous and influential textbook, Economics: an introductory analysis, he wrote (page 36) that Adam Smith, ‘the canny Scot’:

‘was so thrilled by the recognition of an order in the economic system that he proclaimed the mystical principle of “the invisible hand”: that each individual in pursuing only his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious. This unguarded conclusion has done almost as much harm as good in the past century and a half, especially since too often it is all that some of our leading citizens remember, 30 years later, of their college course in economics.’

But the ‘canny Scot’, of course, said no such thing.

Smith did not proclaim ‘the mystical principle of “the invisible hand” ’. He was so reticent about his use of the metaphor that he mentioned it only once in Wealth Of Nations, more than half-way through his book, buried in a chapter about how some cautious (risk-averse) merchants preferred the ‘home trade’ to ‘foreign trade’ in pursuit of their ‘own security’.

Smith never proclaimed in favour of ‘selfishness’, nor did he describe the actions of such merchants as ‘selfish; he always recognised self-interest’, which he never confused with ‘selfishness’, an attribute of Bernard Mandeville's philosopy (1734), which Smith regarded as licentious'.

Smith never regarded nor stated that ‘any interference with free competition by government was almost certain to be injurious’; he identified the circumstances where government policies, such as the dominant policy of mercantile political economy since the 16th century, had slowed ‘progress towards opulence’ and he identified which of these policies should be changed.

Smith didn't think much good came from sovereigns and legislators telling merchants what to do - he didn't think governments were up to the task

In fact, Smith identified that the main ‘interference’ with ‘free competition’ came from the ‘merchants and manufactures’ themselves, with their agitation for legislators, and those who influenced them, to legalise or award monopolies and trade protection, which were against the public interest in general and the interests of consumers in particular.

I conclude, given the misunderstanding of Adam Smith’s political economy that began in the mid-twentieth century, which led to ideological protection of much corporate behaviour (not much different from their behaviours in his day) that if Samuelson had read Moral Sentiments and Wealth Of Nations for himself, instead of recalling what he was taught incorrectly by his Chicago tutors in the 1930s, he could have prevented many tens of thousands of students, who in the 16 editions of his textbook taught from it well into the 1970s, from ‘remembering’ the same error that he passed on to them, many of whom became teachers of yet more students. And so the myth was spread across generations of studenets and tutors.

His readers spread the nonsense of the myth of the invisible hand widely for more than forty years. They have also made Adam Smith culpable for the current crisis, when, he is, in fact, wholly innocent. The epigones are the guilty party.

Tuesday, March 17, 2009

The Loose Morality of Accountability in Banking

A correspondent drew my attention some time ago to a statement in Moral Sentiments, which was withdrawn from edition 2, but is reproduced in edition 6 as an editor’s footnote on p 111 (Oxford University Press edition):

‘A moral being is an accountable being. An accountable being, as the word expresses, is a being that must give an account of its actions to some other, and that consequently must regulate them accordingly to the good liking of this other. Man is accountable to God, and his fellow creatures. But tho' he is, no doubt, pricipally accountable to God, in the order of time, he must necessarily conceive himself as accountable to his fellow creatures before he can form any idea of the Deity, or the rules by which that Divine Being will judge of his conduct.’ (TMS III.1.3. footnote [2], p 111)

CommentApart from this being an example of Smith's editing out of earlier several references to God and the Deity, the idea of accountability to ‘fellow creatures’ may have some relevance to those bankers, traders, fund managers, and their assorted ilk, who seem to have escaped accountability even to today’s, and future, taxpayers who are paying to keep them in business and, apparently, in bonuses.

Monday, March 16, 2009

Britain's Strategic Error After 1776

There was a discussion this morning on BBC Radio 5 asking the question: ‘What are the British military forces for?’ Now I shall not comment on the ‘phone-in’ callers’ views – listening to those members of the ‘public’, who air their views on ‘phone-ins’ about the ‘big issues of the day’, often raises unwelcome doubts about the benefits of universal suffrage – but I will comment generally.

Presently, I am preparing an essay for the David Hume Institute (Edinburgh) on the defence interests of Scotland (currently interrupted by my more important paper on the 'Alleged religiosity of Adam Smith' for the annual conference of the History of Economics Society in Denver, Colorado), but, while listening, I thought of something Adam Smith wrote in 1776, which given the history of Britain since its defeat by its former colonists in North America, has poignant meaning for Britain in the 21st century.

Recall that Wealth of Nations was written as a critique of the policies of British governments since the 16th century (Elizabethan times) on domestic policy (saddling the country with what became meddlesome monopolies in the Town Guilds - ‘members of the same trade’, etc.,), restrictive monopolies in the Statute of Apprentices (limiting the spread of human capital), the Settlement Acts (corralling labourers and their families to the Parish they were born or married in), and the Navigation Acts (meant to enable Britain to defend itself as an island from marauding Continental princes, but which became an instrument to monopolise North American trade).

Wealth Of Nations also promoted the policies that Smith called mercantile political economy – jealousy of trade, wars with trading partners, political interference and rivalry in the dynastic successions of Continental sovereigns, trade protection using tariffs and prohibitions and boycotts, a preference for exports over imports, and the hoarding of gold and silver bullion. It also had the effect of participation in the slave trade, and not a little piracy.

That first empire ended fortuitously; if only legislators and those who influenced them had listened carefully to what Adam Smith said in the very last paragraph of the last chapter of Wealth Of Nations and had acted accordingly. Instead, in a crass strategic error of historical magnitude, British governments slid into a second Empire in India, Canada, Caribbean islands, Australia, New Zealand, Hong Kong, South-east Asia and, later, Africa. The millions that the North American colonies cost in two 18th-century wars, pale into insignificance beside the millions that the Victorians spent on the Royal Navy and British occupation armies (not a few of the personnel of which came from Scotland), and which British governments in the 20th century continued to spend, on top of what was exported as capital despite these costs, is unimaginable.

But Adam Smith’s proposal for a different path in 1776 was ignored by legislators and those who influenced them, and the rest, as it is said, is history:

‘The rulers of Great Britain have, for more than a century past, amused the people with the imagination that they possessed a great empire on the west side of the Atlantic. This empire, however, has hitherto existed in imagination only. It has hitherto been, not an empire, but the project of an empire; not a gold mine, but the project of a gold mine; a project which has cost, which continues to cost, and which, if pursued in the same way as it has been hitherto, is likely to cost, immense expence, without being likely to bring any profit; for the effects of the monopoly of the colony trade, it has been shown, are, to the great body of the people, mere loss instead of profit. It is surely now time that our rulers should either realize this golden dream, in which they have been indulging themselves, perhaps, as well as the people, or that they should awake from it themselves, and endeavour to awaken the people. If the project cannot be completed, it ought to be given up. If any of the provinces of the British empire cannot be made to contribute towards the support of the whole empire, it is surely time that Great Britain should free herself from the expence of defending those provinces in time of war, and of supporting any part of their civil or military establishments in time of peace, and endeavour to accommodate her future views and designs to the real mediocrity of her circumstances.’ (WN V.iii.92: 946-947; Edwin Canaan, 1937 edition, 899-900)

In the 21st century, Britain still imagines itself militarily as an, albeit, leading military police power (its defence forces are of excellent quality but their political masters are, er, not), politically as a leading player at the United Nations, in the European Community, and the Commonwealth, the G8 and G20, and the WTO. Surely it is time that British governments should distinguish between what exists 'in imagination only' and ‘endeavour to accommodate her future views and designs to the real mediocrity of her circumstances’?

Friday, March 13, 2009

An Economist Talks Sense

“Adam Smith’s invisible hand -- the idea that free markets lead to efficiency as if guided by unseen forces -- is invisible, at least in part, because it is not there,” Stiglitz wrote in a 2002 article in The Guardian newspaper. The idea implies that there’s an important role for government to play in the economy, he wrote.”

CommentWell, Stiglitz is on the right track, almost. The invisible hand is not there at all. It’s a mystification of the economic processes of commercial markets in general and state-capitalist markets in particular.

The allocation of resources, production transformations into products and services that are sold in markets, and government expenditures and waste are all explainable without imaginary, invisible body parts, which belong to superstition, mumbo jumbo, and represent the absence of science.

So, good old Stiglitz, I say (for once), and may the readers of Blomberg.com take note.

Thursday, March 12, 2009

Adam Smith and Religious Beliefs

Stephen L. Bloom, a Christian lawyer serving clients throughout Pennsylvania, writes in Good News Daily (‘hope after the headlines’)HERE:

“Good News on the Law: More Laws or More Freedom to Cure the Great O-pression?”

“But to dismiss or underestimate Adam Smith at such a time as this would be a dangerous mistake. Because Smith – although he was a Deist, rather than an orthodox Christian – clearly understood exactly the nature of our menace: The fallen, sinful, self-centered, and hopelessly self-interested human heart; “the imperfect propriety,” as he called it, of our own conduct. And the general economic system Smith articulated in the illumination of that understanding has been the only one ever devised, before or since, to effectively and consistently harness the power of our horrible human greed and transform it for our common good.”

CommentAdam Smith was not a Christian, ‘orthodox’ or otherwise. I am not sure what Stephen implies by the words: ‘although he was a Deist, rather than an orthodox Christian – clearly understood exactly the nature of our menace’.

Is this a suggestion that only ‘orthodox Christians’ and ‘Deists’ understand the ‘The fallen, sinful, self-centered, and hopelessly self-interested human heart; “the imperfect propriety”?

It is this kind of moral arrogance that gives adherents of religion – any religion – a ridiculous aura. Adam Smith was a moral philosopher and perfectly capable of understanding the culpability of human beings in amoral and immoral behaviours, as did philosophers long before Christianity was known about. They, and he, wrote extensively about the whole range of human behaviours.

As for Deism, proclaiming such matters, especially contrary views to the prevailing orthodoxies of 18th-century society, was not just a matter of exercising an imaginary freedom of speech – an unknown freedom in Scottish society under any of the denominations of Christianity, none of which were any more tolerant than any other when they achieved political power.

The last man (a boy actually, a student) to be hanged for blasphemy, in his case on trumped-up and spurious charges, Thomas Aitkenhead, was hanged in Edinburgh in 1697, and the last witch, a woman more senile than evil, was burned to death in 1727. On an almost weekly basis, somewhere across Scotland, young girls were paraded before the Kirk to be harangued and humiliated by sanctimonious ministers, breathing fire and indignation, for sins of reputation or imputation over sexual activities, not a few of which were caused by members of their incestuous families.

David Hume was accused by Agnes Galbraith of fathering her child out of wedlock in the Chirnside Kirk, 25 June, 1734. She appeared in the sackcloth and was committed to the pillory. (See Mossner, E. C. The Life of David Hume, Oxford, 1980).

Of Course, Hume was widely believed to have been an atheist, a ‘crime’ for which those (very few) who declared to be so, were excluded from ‘polite’ society. He was refused chairs by both Edinbrugh and Glasgow Universities on the interventions of Kirk ministers. Hence, most sensible people took pains never to be suspected of the lack of belief that dare not be named.

Among them was Adam Smith. He had many profound family reasons not to appear as anything other than a Christian (his mother was deeply religious and he would never do anything to upset her). As a professor, he had signed the Calvinist Confession of Faith before the Glasgow presbytery – no signature, no professorship – and he had to open his daily lectures with a prayer, which he tried unsuccessfully to be excused from. He delivered his prayers more in the manner of Natural rather than Revealed religion, for which some still complained (Natural Religion was part of the Moral Philosophy syllabus).

Smith wrote Moral Sentiments with a scattering of Christian sentiments throughout, though they were often qualified by innocuous words and phrases that have passed unnoticed so far (I am documenting these at the moment for my paper to be presented at the Annual Conference of the History of Economics Society in Colorado this June). If he hadn’t done so, his book would likely not have been published; as it was some opinionated divines found grounds upon which to quarrel, some, like Bishop Magee, blamed Smith for his association with the ‘atheist David Hume’. (Hume never admitted to being an atheist)

A further question emerges: to what extent was Smith even a ‘Deist’, or had he abandoned all faith in religion? That remains to be seen – my paper addresses this latter question in the (cautious and tentative) affirmative.

For Stephen, the ‘Christian Lawyer’, who layers his proposals for the current financial problems with a dose of ‘freedom’ may feel obliged to let his case rest solely on his own Christian theology when it becomes clear that Adam Smith’s moral philosophy stands alone without association with any religion.

Given Stephen's ‘misunderstanding’ of Smith’s political economy as manifested in the rest of his article, I doubt whether he will do other than continue to hide under the misapprehensions he has about Smith’s supposed views on religion.

Amartya Sen's Two Brilliant Essays on the Relevance of Adam Smith Today

Amartya Sen writes two great articles of current relevance on Adam Smith. The shorter one is in the Financial TimesHERE and the longer one is in the New York Review of BooksHERE.

I recommend them both to you (following correspondents asking if I had read them, and, presumably, looking for my comments on Lost Legacy). As I have been busy completing my paper on ‘Adam Smith’s Alleged Religiosity’, I chose not to post a comment last week, but to generate more publicity for an approach with which I agree and I am pleased now to recommend them and I provide links to the two articles and a very short extract:

‘Adam Smith’s market never stood alone’

“For example, the pioneering works of Adam Smith in the eighteenth century showed the usefulness and dynamism of the market economy, and why—and particularly how—that dynamism worked. Smith's investigation provided an illuminating diagnosis of the workings of the market just when that dynamism was powerfully emerging. The contribution that The Wealth of Nations, published in 1776, made to the understanding of what came to be called capitalism was monumental. Smith showed how the freeing of trade can very often be extremely helpful in generating economic prosperity through specialization in production and division of labor and in making good use of economies of large scale.

Those lessons remain deeply relevant even today (it is interesting that the impressive and highly sophisticated analytical work on international trade for which Paul Krugman received the latest Nobel award in economics was closely linked to Smith's far-reaching insights of more than 230 years ago). The economic analyses that followed those early expositions of markets and the use of capital in the eighteenth century have succeeded in solidly establishing the market system in the corpus of mainstream economics.

But Smith's defense of private trade only took the form of disputing the belief that stopping trade in food would reduce the burden of hunger. That does not deny in any way the need for state action to supplement the operations of the market by creating jobs and incomes (e.g., through work programs). If unemployment were to increase sharply thanks to bad economic circumstances or bad public policy, the market would not, on its own, recreate the incomes of those who have lost their jobs. The new unemployed, Smith wrote, "would either starve, or be driven to seek a subsistence either by begging, or by the perpetration perhaps of the greatest enormities," and "want, famine, and mortality would immediately prevail...."

Smith rejects interventions that exclude the market — but not interventions that include the market while aiming to do those important things that the market may leave undone.

Despite all Smith did to explain and defend the constructive role of the market, he was deeply concerned about the incidence of poverty, illiteracy and relative deprivation that might remain despite a well-functioning market economy. He wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive. Smith was not only a defender of the role of the state in doing things that the market might fail to do, such as universal education and poverty relief (he also wanted greater freedom for the state-supported indigent than the Poor Laws of his day provided); he argued, in general, for institutional choices to fit the problems that arise rather than anchoring institutions to some fixed formula, such as leaving things to the market.”

Amartya Sen received the 1998 Nobel Prize in economics; he teaches economics and philosophy at Harvard University and he has written an introduction for the anniversary edition of ‘The Theory of Moral Sentiments’ (Penguin Books, 2009) in which he discusses the contemporary relevance of Smith’s ideas.

Friends Like Richard Are No Help At All

'So, what's in this for me?" my friend wanted to know. He was asking in good Adam Smith fashion - whose theory was that the common good emerges when everybody works for their own selfish interest - how he could benefit from the current financial crisis.’

CommentI would advise ‘Zach’ (Richard Bernstein’s friend) not to ask said Richard anything about what’s going on (or not, as the case maybe) in the house-finance markets, because anybody who does not know what Adam Smith’s ‘theory’ (indeed, moral philosophy) was about, and who makes such a ridiculous tabloid hash of it, is not the person to trust on such matters.

Adam Smith never said anything like: ‘the common good emerges when everybody works for their own selfish interest’. And this is not just a quibble.

Smith gives over 50 instances of people working for their ‘own selfish interest’, under the guise of working for their ‘self interests’ (a quite different idea, but that will only confuse Richard), which worked against the ‘common good’ in Books I and II of Wealth Of Nations. Clearly, Smith would not have been so inconsistent as Richard claims him to have been.

In fact, Smith never spoke favourably of selfishness. Richard confuses him with Ayn Rand (1960s) or even Bernard Mandeville (1734). They both lauded selfishness (Rand by making it a virtue and Mandeville by making it a social compulsion – ‘private vice, public benefits’). But not Adam Smith; he called Mandeville's theory 'licentious'.

Tuesday, March 10, 2009

Folly Of Relying on Poor Teaching

“The idea that individual greed might help boost wider economic conditions and thus wider society too, was first suggested by the great Scottish economist and philosopher Adam Smith in his Wealth of Nations in 1776:

“By directing that industry in such a manner as its produce may be of the greatest value, (the individual) intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

Alas, this recipe has recently gone a bit wrong. Given free rein, the invisible hand of the market didn’t allocate resources quite as accurately as expected”

CommentReaders familiar with this quotation will know that it is truncated from several pages of argument which ‘estherbintliff’ is either suppressing to make her argument stronger or, more likely, is unaware of, and therefore comes to the conclusion that suits he argument. The full analysis containing the quotation runs across pages 453 to 457 in Book IV of Wealth Of Nations, chapter 2.

First, Adam Smith never endorsed a policy of, or the behaviour of, greed. That is to confuse Adam Smith with Bernard Mandeville, author of the Fable of the Bees, 1734 (written over the years 1704 to 1737), who made greed a private vice but a public good. These views had nothing to do with Adam Smith, who described Mandeville’s theories as ‘licentious’.

Second, in the quotation esther has made (she claims to have done A-level economics), Adam Smith was talking about the influence of risk-avoidance on the decision of some merchant traders not to engage in foreign trade, even though it was more profitable, and to confine their activities to their domestic country of residence.

Meanwhile, other merchant traders traded with foreign places (largely with the British colonies in North America) because the higher profits of this monopoly trade compensated them for the risks of the Atlantic voyages, uncertain legal decisions, piracy, and fraud.

So Smith was not making a general point about self interest being always beneficial; it clearly wasn’t – he gave over 50 examples in Books I and II of Wealth Of Nations of self-interested actions which led to sub-optimal, as we say today, outcomes for society.

On the example, he quoted above, the outcome of risk-avoidance was that the local society’s annual output was higher than it would otherwise be (the whole is the sum of the parts), which is hardly a stunning conclusion in these circumstances. The metaphor of ‘an invisible hand’ is not of general applicability and neither did Adam Smith say it was.

I am sorry to say that brief encounters with a ‘leftwing teacher of A-level economics’ is not a safe source for the real views of Adam Smith.

Ayn Rand and Adam Smith Were Opposites

“From Alan Greenspan to Ayn Rand and way back to Adam Smith, there exists a type of social and economic Darwinism. "Don't give to charity, because the weak need to die out for the preservation and betterment of society" (feel free to accuse me of oversimplification, I am guilty). From Reagan to Bush I to Clinton to Bush 2, the model of Chicago Economics has had their fingerprints all over economic and foreign policies to the ultimate detriment of global economics and social welfare, working directly against redistribution of wealth, and the separation of social and economic classes.

Ayn Rand claimed that unmitigated greed was ultimately good for a society. It was needed in order that common wealth may be shared among those with the common greed. Alan Greenspan, a direct ideological descendant of Rand, claimed later there seems to be a serious flaw in his economic model. Unchecked greed has brought us all to the point where we are today. Irresponsible lending, borrowing, spending, and a lack of concern over our neighbor (whomever it may be) has flushed away life savings of those in search of the prototypical American dream.”

To which Jon responds:

“Re: From Alan Greenspan to Ayn Rand and way back to Adam Smith, there exists a type of social and economic Darwinism. "Don't give to charity, because the weak need to die out for the preservation and betterment of society"

Putting Adam Smith in the same class as Ayn Rand is like putting Mother Teresa in the same class as Torquemada. Smith was not any kind of Social Darwinist (And not just because Darwin was still some years in the future). He was in fact deeply suspicious of the machinations of the rich and powerful (very much on rank display in George III's England) and he was in favor of the public amelioration of the sufferings of the poor.”

CommentIt is pleasing to see others correcting the usual parade of unchallenged attributions to Adam Smith which are not erroneous, but also the exact opposite of his ideas, sentiments, and writings.

Smith throughout his writings showed an abiding passion for steps towards opulence as the only sure and certain means by which the families of the labouring poor – the overwhelming majority of society’s populations – would participate in the benefits of commercial society from the increased annual output of the ‘necessities, conveniences, and amusements of life’.

It is too fashionable in the opulent economies of the world to decry the importance of economic growth (ironically, and noticeably, in Blogs emanating from California) on some confused ideas of morality, as if being poor was a blessing, when in fact it is a curse, as any acquaintance with poverty – the absence of wealth – in large parts of the rest of the world would quickly be appreciated by those who, comparatively are rich beyond avarice, write those sanctimonious Blogs.

Good on ‘Jon’ for pointing out to ‘Adam M’ his grasp of the history of ideas leaves much to be desired.

Monday, March 09, 2009

Adam Smith on Liberty

“Adam Smith, who lived in the eighteenth century, provided the philosophical and most systematic arguments for the underpinnings of a laissez-faire economic system in his book “The Wealth of Nations.” Smith makes the argument that it was only the interference of government which disrupted the natural working of economic society and created poverty and decay rather than abundance and harmony.

As Smith explained:The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred obstructions with which the folly of human laws too often encumbers its operations.

The drive for greater government regulation is the drive toward increased poverty, unemployment and the loss of liberty. With the Obama administration pushing an ever expanding federal government plan to take control of our financial institutions, health care system, the auto industry, and its attack on free speech, the time is now to clearly articulate the differences between free markets and free people, and government administered markets and government control of our lives.”

CommentSmith was more ‘nuanced’ (as is the fashion in these matters) about the causes of wealth creation (poverty is not ‘caused’; it is a consequence of the absence of wealth). Smith did not ‘underpin’ laissez-faire as an economic system in Wealth Of Nations. That is an ideological myth.

He wrote a critique of the existing political economy of the British state and, by implication, of other European states. He did not dismiss all government actions and interventions; his critique focused on specific government policies, some in place since the 16th century, summarized as mercantile political economy, and which directly hindered the creation of wealth and thereby allowed poverty to continue for a segment of the population.

These mercantile policies included ‘jealousy of trade’ against neighbours (who were Britain’s customers), wars that projected political interferences in continental countries and not to promote legitimate defence interests of an island society, erroneous policies of hoarding gold and silver which led to tariffs and prohibitions on wealth creating trade, laws and statutes than inhibited capital and labour mobility (the Town Guilds, Corporate monopolies of wholesale and retain trades, Apprentices Statutes, and Settlements Acts, all of which were promoted by legislators and those who influenced them, and, the roles of Chartered Trading Monopolies (the East India Company) and the foundation of colonies in North America, which grossly distorted wealth creation through trade monopolies, excess profits, and expensive wars to maintain, well beyond any benefit to Britain.

In response to these inhibitions by government policies, Smith advocated a substantial role for government in funding the infrastructure investment across Britain in project to ‘facilitate commerce’, such as in a national road-building programme, the creation of safe harbours for trade and travel, canals between population centres, the paving of large towns, street lighting, sewage and waste disposal, and the proper administration of ‘police’ (a broader term than modern day usage, which included ensuring the appropriate supply and regular availability of subsistence for town populations.

He also advocated national education facilities in ‘little schools’ in every parish to educate every child to ‘read, write, and do account’, preferably with some geometry in place of Latin because such skills would be more suitable for young adults looking for work. He also made a little noticed case for government palliative care for people suffering leprosy and ‘other loathsome diseases’ (a provision with large future cost implications).

Smith saw competition as the major stimulus for commerce in place of monopoly and regarded many ‘merchants and manufacturers’ as a barrier to the growth of commerce from the attempts to lobby legislators and those who influenced them for trade protection and special privileges.

Doug Thorson may not appreciate the extent to which Adam Smith was not an advocate of laissez-faire as advanced by some the French économistes or Physiocrats. In 17th-18th-century France, local trade markets were highly regulated by central government and the inspectors appointed by Government interfered closely in the day-to-day running of businesses, large and small, to a degree unknown in Britain. Their cry for ‘laissez nous faire’ had a different basis to Smith’s advocacy of commercial markets where possible, government intervention where necessary.

The ‘folly of human laws’ was not advanced by Adam Smith as a case for no, or limited, laws. He insisted on instruments of justice as a foundation for human society, but he knew, as we do, that governments pass laws regularly, some of which are manifest follies in the consequences, and which are the faults of the use of political processes for sectional interests.

That is why Liberty, enshrined in law and practice, is a foundation for the creation of wealth.

How To Make a Problem Worse

“From an academic point of view the results of the demonstration was spectacular. Some of the participants rediscovered the theory of supply and demand, more than 200 years after Adam Smith described it in his Wealth of Nations. "When we catch more fish the price goes down; when we catch less the price goes up," a young participant said.

Umar's main demand was to empower fishermen to set their own prices. He does have a point here. Currently the market is a buyer's market where a cartel of monopolists decides the price because they are better organized with more resources. Fishermen could get better prices if they had collective bargaining power.

On the other hand, Umar's demand for base prices of Rf 45/kg for yellow fin tuna and Rf 10/kg for skipjack may not be feasible without government subsidies. The question is can the Maldives afford more subsidies in the present economic crisis?”

CommentI found this snippet interesting. The problem is the “cartel of monopolists” which pays fishermen a price much lower than the desired price the fishermen want (presumably they can see how much their ‘yellow fin tuna’ and their ‘skipjack’ sell for at wholesalers’ cartel prices).

Their ambition is to secure, somehow, ‘collective bargaining power’, presumably by a new law or by collective action to break the cartel., and then to raise their prices to Rk 45/kg and Rf 10/kg respectively. The retail prices of the fish are not stated, but there are bound to be distribution costs and profit to be added.

If the government is to subsidise from taxation to bring the retail price down to what is currently affordable it seems this policy would open up other problems, not least of which is: to whom is the subsidy paid? The fishermen, the wholesale buyers, the consumer?

In the context of general subsidies already (‘can the Maldives afford more subsidies in the present economic crisis?’), distorting an already distorted market (the prevalence of the ‘buyers cartel’) is not a sensible policy.

Supply and demand at this level cannot be ignored. If the ‘participants’ take note of supply and demand (with or without Adam Smith’s cumbersome analytical structure) and it operates in the Maldives fishing sector, it suggests that the fishermen’s collective buying power will also rise and fall in its negotiated price, and so will government subsidies, and the retail price of fish.

The problem is caused by the buyers’ cartel and the fishermen’s submission to it.

Without knowledge of the geography of the Maldives I cannot suggest the appropriate response to implement the Smithian remedy of breaking monopoly powers on both sides of the market. But the answer lies in that area rather than in government (taxpayers’) subsidies.

As a correspondent reminds me, Adam Smith commented on the practice of subsidies and bounties for the fishing sector from government in Wealth Of Nations:

"Secondly, the bounty to the white-herring fishery is a tonnage bounty; and is proportioned to the burden of the ship, not to her diligence or success in the fishery; and it has, I am afraid, been too common for vessels to fit out for the sole purpose of catching, not the fish, but the bounty" (WN IV.a.32: p 520).

Saturday, March 07, 2009

Morality and Economics

'From what I can see, "morality" is a category of behaviors that result from the self-interest of many agents. It is a form of self-organization of these agents according to their mental capabilities into groups behaving according to implicit rules that will become explicit in humans and has an analogy in economics. Its like circumstances are being guided by an "Invisible Hand". "The Invisible hand" is "an economic principle, first postulated by Adam Smith, holding that the greatest benefit to a society is brought about by individuals acting freely in a competitive marketplace in the pursuit of their own self-interest."The American Heritage® Dictionary of the English Language, Fourth Edition. Houghton Mifflin Company, 2004. Answers.com 04 Mar. 2009. http://www.answers.com/topic/invisible-hand)

The difference between Self-interest and SelfishnessI see a lot of people make the claim that Adam Smith was endorsing "selfishness". Selfish is to Self-interest as Revenge is to Justice. While similar in concept, one is harmful and the other is not. Selfish and Revenge are about gaining an advantage, Self-interest and Justice are about maintaining an equilibrium.”

CommentI have no comment on the author’s ‘de-bunking Christianity’ mission.

Mankind has always lived in societies, as our primate ‘cousins’ did and do. Smith’s Moral Sentiments is about the social basis of morality, the primitive origins of which pre-dates Christianity by hundreds of thousands of years, and is older than the earliest beliefs of the earliest religions. While bones fossilise, beliefs don’t.

Early Hominines (the hominids) were born into groups – they didn’t ‘form’ into groups (as far as we can surmise). The speciation from the Common Ancestor 4-6 million years ago (itself a social animal) was from an existing group of primates, some individuals of which speciated separately into chimpanzees, which also live in groups. What changed for the hominine species was the continuation of development manifested in bipedal postures and walking, growing brain-size and development, intense sociability, and changes in the social arrangements for reproduction to accommodate biological changes.

Given that economic aspects of social life pre-dated commercial society I am not clear how analogous moral behaviours are to economics. Lee Randolph cites a statement in The American Heritage® Dictionary of the English Language (see link above), which on this evidence is likely to be unreliable: "The Invisible hand" is "an economic principle, first postulated by Adam Smith”.

Readers will know that The Metaphor was not an ‘economic principle’ that was ‘postulated' by Adam Smith. It has become an ‘economic principle’ and was ‘postulated’ by modern economists since the 1950s, and has nothing at all to do with Adam Smith, nor any of the many other 18th -century authors who used the same metaphor in their literary works.

However, I think Lee Randolph is quite right when the identifies the differences between selfishness and self interest when he writes: ‘Selfish[ness] and Revenge are about gaining an advantage, Self-interest and Justice are about maintaining an equilibrium.’

Friday, March 06, 2009

Marxists, Sort Of, Speak Out

‘The great promise of capitalism, as first suggested by Adam Smith and recently enshrined in "market fundamentalism," was that we didn't have to figure anything out, because the market would take care of everything for us. Instead of promoting self-reliance, this version of free enterprise fostered passivity in the face of that inscrutable deity, the Market.’ ‘Rising to the Occasion’, by Barbara Ehrenreich & Bill Fletcher Jr in The Nation Blog, HERE:

CommentYou can’t blame Barbara and Bill for repeating the error they have been taught by modern generations of economists since the 1950s. It has nothing to do with their sort of, Marxism (read their post in full from the link).

It would be much better to teach what Adam Smith did say about how markets work within a commercial society (Books I and II of Wealth Of Nations), which includes requirements for the rule of law, personal liberties, and appropriate national policies that were not driven by jealousies of trade, monopoly practices and restrictions, and a lack of care for society as a whole.

Perhaps this extract from Moral Sentiments could help set the scene:

“What institution of government could tend so much to promote the happiness of mankind as the general prevalence of wisdom and virtue? All government is but an imperfect remedy for the deficiency of these. Whatever beauty, therefore, can belong to civil government upon account of its utility, must in a far superior degree belong to these. On the contrary, what civil policy can be so ruinous and destructive as the vices of men? The fatal effects of bad government arise from nothing, but that it does not sufficiently guard against the mischiefs which human wickedness gives occasion to.” (Theory Of Moral Sentiments, 1759: Book IV)

Thursday, March 05, 2009

Some thoughts on ‘Spontaneous Order’ Type Explanations

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The market, explains Hayek is “the result of human action but not of human design.” I agree wholeheartedly with that statement. The problem comes next when we try to explain how the processes of human action become the outcome known as market solutions.

I am not convinced that the concepts of 'spontaneity', or 'invisible hands', in their modern guises (since the 1950s) advance science as an explanatory mode for understanding complex fields like markets, social change, and social evolution.

The problem I have with ‘spontaneity’ is in its inadequacy for explaining how markets work; it substitutes a conclusion (spontaneity) for a process. In its ‘invisible hand’ guise, I have criticised it on Lost Legacy for its mystical tones. It is a particular target for my criticism of modern attributions to market forces, though in fact, markets have been well understood since Adam Smith’s days. He did not need, nor did he use, an ‘invisible hand’ non-explanation to analyse market exchanges through price signals in Books I and II of Wealth Of Nations, though modern economists slip the metaphor in at every opportunity and, today, many believe that the metaphor of 'an invisible hand' is the explanation.

Human action in markets has history behind it. The propensity to ‘truck, barter, and exchange’ did not appear spontaneously; it was not an innate faculty that humankind were born with. It emerged over untold millennia and, in a sense, it still is emerging in its contests with that prime alternative to voluntary exchange, that of violent plunder, theft, and coercion, which I have attempted to explain in my papers, The Pre-History of Bargaining, Parts I and II; and about which I may soon be re-writing into an accessible book.

People learn, as they do in most cases of human-to-human exchanges, to barter and exchange through processes like mutually beneficial reciprocation (‘quasi-bargaining’), Gift exchanges common to all human cultures, and the simultaneous exchanges of modern bargaining, all of which have a long history and pre-history. I agree with Jim Otteson that people are engaged in exchange across a wide variety of social fields (Otteson, J. 2002: Adam Smith’s Market Place of Life’, Cambridge University Press).

Human knowledge is passed on and absorbed by generations in all aspects of life, which need not mean that lessons once learned are adopted, but neither do they need to re-invent everything in the knowledge base. But humans are thinking actors as well, and the proclivity of trying to ‘improve’ how they and others act is ever present, not least because any form of human action has positive and negative outcomes (if only in the opinions of some observers).

My main consideration in this post is not to present a new theory. That themes of modern ‘explanations’, such as ‘spontaneous order’, and, to an extent, that of the attribution to Adam Smith of what modern economists call the ‘invisible hand’ phenomenon, do not explain, indeed obfuscate, what Adam Smith stated was the purpose of philosophical science, namely, to reveal the ‘connecting principles of nature’, which ‘abounds’ with:

‘events that appear solitary and incoherent with all that go before them’… ‘by representing the invisible chains which bind together all these disjointed objects, and endeavours to introduce order into this chaos of jarring and discordant appearances, to allay this tumult of the imagination, and to restore it, when it surveys the great revolution of the universe, to that tone of tranquillity and composure which is both most agreeable in itself, and most suitable to its nature’ (Adam Smith: 'History of Astronomy', II.12: pp 46-47).

General themes, such as ‘spontaneous order’ and ‘invisible hand’ explanations move away from science in my, necessarily, humble view, in contrast to Smith's use of the example of uncovering the ‘connecting links’ with his parable of the loadstone under the table actually moving the pieces of iron on the table, which an uninitiated observer thinks are moving miraculously on their own! But once explained by the physics of magnetic fields, the ‘miracle’ (such as an invisible hand explanation) disappears (Smith, 'History of Astronomy', II.5 p 40, 42), but when it is left unexplained, notions of ‘mystical’ orders and ‘invisible’ body parts, take on a credibility of their own

In Moral Sentiments and Wealth Of Nations, on the two occasions only where he uses The Metaphor of an invisible hand, he explains the cause of the supposed 'miracle' first and introduces The Metaphor last. I think the science of the explanation is more important than The Metaphor, and I offer the thought that we should concentrate on the science, not The Metaphor.

Taking my analysis of Adam Smith's two cases (the Astronomy incident of the Roman god Jupiter, is sui generis), I have shown exactly what Smith indicated were the causes of the so-called invisible hand 'events'. In Moral Sentiments, the landlords did what they could not avoid doing in three ways: first, they used some proportion the food output from their land for their own consumption (not all of which went into their limited stomachs - they could also 'sell' some amount of the food output for purchasing other goods that were not restricted by the size of their stomachs - jewellery, fancy clothes, artefacts, and luxuries, or their consumption of their profits); secondly, they used another proportion of the output for next year's sowing (no seeds, no food); and thirdly, they paid some of their output as the subsistence for their peasants and their families to survive the winter to do next season's farming, herding, and so on. All fully explained; no 'invisible hand' at work; we can see the loadstone!

In Wealth Of Nations, he described how the psychological state of degrees of risk-avoidance led some wholesale merchants to trade with the colonies for compensating higher profits, under a regime of the monopoly Navigation Acts and the power of the Royal Navy; and he described the circumstances that led some other merchants to invest locally, even for lower, or not much less of the same profits, which added to national output (because the whole is the sum of its parts – the more parts the larger the whole). Again no need for an invisible hand, except as a metaphor, which is the proper use of metaphors (Adam Smith: Lectures in Rhetoric and Belles Lettres, {1762-3]).

Briefly, I think the science of the explanation for events is far more important than the themes of 'spontaneous order' and the metaphor if an 'invisible hand'. I offer the thought that we should concentrate on the science and not the themes.